Penalty for disallowed tax claim not warranted where the deduction position was supported by then-existing judicial authority.

Penalty under section 271(1)(c) was held not leviable where the assessee's section 80HHC claim was made on the basis of then-prevailing judicial authority and was later rejected only after the Supreme Court clarified the interplay with section 80AB. The court treated the claim as neither wholly without basis nor lacking bona fides, and held that a mere disallowance in quantum proceedings does not by itself establish furnishing of inaccurate particulars. The deletion of penalty was therefore upheld in favour of the assessee.

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Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable where the assessee's claim under section 80HHC, though disallowed in quantum proceedings, was supported by then-existing High Court decisions and was later negatived by the Supreme Court.

Analysis: The assessee's computation was based on judicial views then prevailing in its favour. The legal position on the interplay of section 80AB and section 80HHC was settled only later by the Supreme Court. In these circumstances, the claim could not be characterised as wholly without basis or lacking bona fides. Following the principle that a mere unsustainable claim does not automatically amount to furnishing inaccurate particulars, penalty was not warranted.

Conclusion: The penalty under section 271(1)(c) was not leviable and the deletion of penalty was upheld in favour of the assessee.

Ratio Decidendi: Where an assessee makes a claim supported by then-existing legal authority, the mere fact that the claim is later disallowed does not by itself establish furnishing of inaccurate particulars or justify penalty unless the claim is shown to be wholly without basis and not bona fide.

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